WASHINGTON – A better than expected performance from the U.S. manufacturing sector in February helped calm investors yesterday, even as economists cautioned that one month's worth of data is not a cause for too much optimism.

Industrial activity, as measured by the Institute for Supply Management's manufacturing index, has alternated between growth and contraction every month since October.

Economists were lukewarm about February's reading of 52.3, though the index was well above the January reading of 49.3 and Wall Street's expectation of 50. A reading above 50 indicates growth for the sector.

Investors were comforted by the data. The Dow industrials erased an early 209-point drop after the ISM data were released, and by midafternoon stocks briefly edged into positive territory.

Global Insight economist Tom Runiewicz said the February data did not assuage his concerns about the economy, particularly regarding the downturn in housing, which hurts makers of building materials and may cause consumers to pull back on spending in other areas.

“One month does not make a trend,” he said.

Runiewicz and other economists said weakness in the housing and auto sectors, plus slowing capital spending by businesses, would continue to weigh on manufacturers for the rest of the year and contribute to slower overall economic growth.

“I expect to see a return to sub-50 readings in the months ahead,” said Michael Gregory, senior economist at BMO Capital Markets. “Overall, the economy is going to do OK, but the factory sector has a few more hurdles to cross.”

The manufacturing report contributed to a mixed picture of the economy yesterday. Spending on housing construction dropped in January, the Commerce Department reported, while a separate report showed that personal spending rose in January at the fastest clip in a year.

On Wall Street, the Dow industrials closed down 34.29 at 12,234.34, after dropping as low as 12,056.54. The Nasdaq Composite Index finished down 11.94 at 2,404.21, following an earlier drop of 56. The broader Standard & Poor's 500 index fell 3.65 to 1,403.17, after earlier tumbling 26 points.

Treasury Secretary Henry Paulson, the Bush administration's chief economic spokesman, said yesterday that he believed all the statistics showed the economy was successfully transitioning to a more moderate and sustainable rate of growth.

“I am watching developments carefully and I believe that the U.S. economy is healthy,” Paulson told the Economics Club of Washington in remarks that were closely watched on the heels of Tuesday's stock market sell-off.

Some manufacturers said they continue to see pockets of economic strength.

Harry Volande, chief financial officer at Siemens Energy & Automation, a U.S.-based unit of Siemens S.A., said that his company has benefited from its alternative energy business, which includes ethanol production equipment, as well as aerospace and nonresidential construction, which have helped offset the housing decline.

Volande said he was thankful that “there are more industries in the United States that are growing” than shrinking.

Kelly McComb, director of marketing for Western Products, a building supplies retailer in Fargo, N.D., said although new home construction has slowed, the remodeling market remains healthy. She said the company has seen rising sales of windows, for example, but less demand for vinyl siding.

The chief economist of the National Association of Manufacturers, David Huether, said despite some positive indicators in the industrial sector, such as rising orders and production, he sees growing inventories as a “dark cloud” that cannot be ignored.

Companies will need to work off those inventories before placing more orders with manufacturers, Huether said.

The February new orders index rose to 54.9 from 50.3 in January, while the production index increased to 54.1 from 49.6, the ISM said. Employment in the manufacturing sector rose in February, with a reading of 51.1 compared with January's 49.5, which signaled contraction.

The customer inventories index increased to 53 from 52 last month, its highest level since January 2001, Huether said.